How We Discourage Investment; H. Hazlitt

Today such a rate is taken for granted. Yet most of those who approve of it, and even suggest it could be a little higher, are the very people who have been com plaining most loudly in recent years about the country's disap pointing rate of economic growth. The present average tax on all corporations is about 45 per cent. On successful corporations of any size, however, the average rate is close to 52 per cent. Broadly speak ing, therefore, when anybody con templates a new corporate invest ment, he will not make it unless the investment promises to yield before taxes at least twice as much 1969 HOW WE DISCOURAGE INVESTMENT 37 as the return he would consider worthwhile. If, for example, a man would not consider a new invest ment worthwhile unless it prom ised a 10 per cent average annual return on his capital outlay, it would have to promise a return of 20 per cent on that outlay before taxes.

What is at least as important as reducing the incentive to invest ment is that the present corporate income tax reduces the funds avail able for investment. In the second quarter of 1968, according to esti mates of the Department of Com merce, U.S. corporations were earn ing total profits before taxes at an annual rate of $92 billion. Out of this their corporate tax liability was $41 billion. This reduced their profits after taxes to $50.7 billion. Out of this sum, in turn, $24.4 bil lion was paid out in dividends while $26.3 billion was retained in undistributed profits. This last figure represents the corporations' own reinvestment in working capital, inventories, im provement, new plant, and equip ment. If there had been no corpor ate tax whatever, and there had been the same proportionate distribution of profits between divi dends and reinvestment, the amount of money reinvested would have been $47 billion instead of $26 billion-about $21 billion, or 80 per cent, more a year.

By discouraging and retarding investment in new machinery and plant, the 52.8 per cent marginal corporation income tax shields ex isting obsolescent capacity from the competition of the new, mod ern and efficient plant and equip ment that would otherwise come into existence, or come into exist ence much sooner. It is obvious that a corporation income tax in the neighborhood of 50 per cent must drastically reduce both the incentive and the funds for new investment, and therefore for the consequent increase in jobs, productivity, real wages, and eco nomic growth that the politicians are always calling for. By striking so directly against new invest ment, in fact, the present high corporate income tax slows down economic growth more effectively than almost any other type of tax. • Copyright 1968, Los An4eles Times. Re printed by permission.